FDIC looks to banks to replenish deposit fund

They also announced that the fund, which had more than $50 billion before the crisis began last year, has been so battered by bank collapses that it would fall into deficit this week.

The plan proposed by the Federal Deposit Insurance Corp. would, in effect, have the industry lend money to the insurance fund by ordering banks to prepay their annual assessments, which would otherwise have been due through 2012, this year. If adopted, the proposal, the agency’s third restoration plan for the fund in a year, would raise $45 billion from the banks to replenish the fund.

That would almost certainly wipe out the industry’s earnings for this year - in the first half of the year the industry reported $1.8 billion in income.

But regulators have instructed the banks that they will not have to record the prepayments as an expense until the fees would ordinarily have been due, postponing the hit to their balance sheets until a time when officials believe the industry could better weather the costs.

With nearly 100 bank failures so far this year, the fund has encountered its greatest crisis since the savings and loan debacle of the 1980s and 1990s. In May, officials projected $70 billion in losses to the fund to rescue failed banks. That estimate was a $5 billion increase from earlier in the year.

Yesterday, the FDIC increased that estimate by more than 40 percent, to $100 billion in total losses - mostly over this year and next. That would be on top of the nearly $20 billion in losses to the fund last year when the crisis began and 25 banks failed.

Officials said that as of this week, the fund, which began the year at more than $30 billion and had about $10 billion over the summer, would be in the red.

The officials said that if nothing were done, the fund would be holding almost exclusively hard-to-sell real estate and other unmarketable assets by early next year. At last report, this summer the fund had about $22 billion in cash and other marketable securities. As more banks have collapsed, most of its liquid assets have been exchanged for the less marketable assets seized from the failed institutions, like foreclosed property.

Officials said that the plan disclosed yesterday was less expensive than a direct loan from the banks, an idea that many banks supported, because no interest would have to be paid and the plan would not be voluntary. And it was preferable to a loan from the Treasury, which some lawmakers and industry executives supported, because even though it would be paid back by the industry, such a loan could be seen as yet another taxpayer bailout.

“It’s clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem,’’ said Sheila C. Bair, chairwoman of the FDIC.

She also emphasized the fund’s plight would have no impact on bank customers, who will continue to have their accounts insured up to $250,000.

The proposed plan was a partial victory for industry executives and lobbyists, who fought against the idea of another special assessment. Last May the government imposed an assessment of 5 cents for every $100 in deposits on top of the regular premiums.

But some bank executives expressed concern about the increase in premiums in two years.

“The industry agrees that this is a better alternative to what clearly would have been several special assessments, but this prepayment will decrease the ability to lend,’’ said Edward L. Yingling, president of the American Bankers Association.